Even a broken clock…
March 26, 2010, 2:35 pm
Posted by Matthew Boudway
From David Brooks’s column in today’s New York Times:
Economics achieved coherence as a science by amputating most of human nature. Now economists are starting with those parts of emotional life that they can count and model (the activities that make them economists). But once they’re in this terrain, they’ll surely find that the processes that make up the inner life are not amenable to the methodologies of social science. The moral and social yearnings of fully realized human beings are not reducible to universal laws and cannot be studied like physics.
Once this is accepted, economics would again become a subsection of history and moral philosophy.
Hmm, I don’t know. Certainly economics is not a “hard” science. It’s a social science. Its subject is human behavior. So it’s like psychology or sociology or anthropology. Or political science.
Brooks writes this: “Real sciences make progress. But in economics, old thinkers cycle in and out of fashion. In real sciences, evidence solves problems.”
I don’t know that he has that exactly right. This much is true of both the physical sciences and the social sciences: practicioners develop hypotheses that are tested by examining evidence. Neither the physical sciences nor the hard sciences have records of unbroken advances, but over time, both make progress.
Not that I know much about science, but to my mind, physical scientists have a more predictable subject to study. The apple that falls from the tree drops toward the earth with such predicability that we can say for all practical purposes that it *always* does that. But the human being who rolls out of bed with some money to invest – well, goodness knows *what* the heck she’s going to do today.
It’s true that science is in general “hard[er]” than economics and other social sciences, Jim, but even something like the “law” of gravity has unexplained dimensions. Newton had brilliant insights about that falling apple, and he discovered how to quantify the force involved. As a result of his mathematics, scientists are able to predict with some certainty what will take place when the force of gravity is at work in the cosmos. But nobody can yet explain exactly what gravity is. Why bodies of separate mass attract one another (no puns please!) remains a mystery, almost as much of a mystery as the mortgage-backed securities that sent the economy into a tailspin. ;)
There’s a mathematical theory called “Bayesian theory” which is concerned with degrees of belief and with how these degrees of belief change with the introduction of new evidence. The theory is used in economics to predict what will happen in the future. It involves the quantification of belief as established by how much money a person is willing to bet on the truth of a proposition when given new evidence/data. Think stock market, among other things. Laws of probabity are central to the predictions. (Or something like that.)
The philosopher Frank Ramsey is responsible for some of the foundations of the theory. He was a friend of Keynes, but they had fundamental differences about probability, with Keynes holding that the future *cannot* be predicted. (So much for economics?)
I have no idea how all this works, but some economists apparently think it does. If you’re interested, check out Bayesian theory, Frank Ramsey, and decision theory. Here’s what Wikipedia says about it in its entry about Ramsey:
“Truth and probability
Keynes in his Treatise on Probability (1921) argued against the subjective approach in epistemic probabilities. For Keynes, subjectivity of probabilities doesn’t matter as much, as for him there is an objective relationship between knowledge and probabilities, as knowledge is disembodied and not personal.
Ramsey in his article disagrees with Keynes’s approach as for him there is a difference between the notions of probability in physics and in logic. For Ramsey probability is not related to a disembodied body of knowledge but is related to the knowledge that each individual possesses alone. Thus personal beliefs that are formulated by this individual knowledge govern probabilities leading to the notion of subjective probability. Consequently, subjective probabilities can be inferred by observing actions that reflect individuals’ personal beliefs. Ramsey argued that the degree of probability that an individual attaches to a particular outcome can be measured by finding what odds the individual would accept when betting on that outcome.
Ramsey suggested a way of deriving a consistent theory of choice under uncertainty that could isolate beliefs from preferences while still maintaining subjective probabilities.
Despite the fact that Ramsey’s work on probabilities was of great importance again no one paid any attention to it until the publication of Theory of Games and Economic Behavior of John von Neumann and Oskar Morgenstern in 1944 (1947 2nd ed.)
P. S. Let me recommend yet again Robert Skidelsky’s “Keynes: The Return of the Master”. Keynes has been called an economist of recessions, and this book shows why. I dare say he might have predicted this one.
Maybe that’s all economists can do — tell us what *won’t” work?
“with Keynes holding that the future *cannot* be predicted. (So much for economics?) ”
Hi, Ann, I definitely agree that economists are much better at explaining what just happened than they are in predicting what happens next.
We like to think of “the economy” as some sort of cohesive system that behaves rationially and predicably, but in actuality it is just the aggregate of many millions or billions of individual transactions – it is a big pile of measurable human behaviors. It is true that it is amenable to the laws of probability; but that doesn’t make prediction a perfect science, any more than a knowledge of the historical record of birth weights allows us to predict with certainty the weight of the next baby born.
“Newton had brilliant insights about that falling apple, and he discovered how to quantify the force involved. As a result of his mathematics, scientists are able to predict with some certainty what will take place when the force of gravity is at work in the cosmos. ”
Hi, William, exactly – there seems to be a law that underlies that physical behavior. Even if we haven’t grasped all the details of it yet, we understand its effects well enough to be able to make accurate predictions.
But what are the analogous laws that make human behavior predictable? A Catholic might note the omnipresence of sin, which gives us insight into motives like greed (e.g. ‘I’ll invest other people’s money in unregulated securities, like MBSs, rather than a well-regulated security like a NYSE-listed corporate stock, because my return on the unregulated security seems so much better’). We might also note the fallibility of humans, which suggests that they will make economic mistakes and misjudgments, sometimes with catastrophic results (e.g. ‘let’s let Lehman Brothers fail.’).